9.1% yield! Should I buy Admiral shares for the dividend?

Concerns over rising inflation have caused the Admiral share price to slump lately. Is now the time to buy the insurer for its huge dividend yield?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young mixed-race woman looking out of the window with a look of consternation on her face

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Admiral Group (LSE: ADM) share price has plummeted 42% in 2022. Based on its dividend forecast for this year, the collapse means Admiral shares currently carry a 9.1% dividend yield.

So is now the time for me to add Admiral shares to my dividend portfolio? Here, I’ll drill into the insurer’s dividend forecasts for the short-to-medium term and reveal whether I’d buy this income stock today.

Admiral’s payout history

Admiral has been a very profitable income stock in recent times.

It has a policy of paying a normal annual dividend equating to 65% of post-tax profit. It also seeks to distribute excess cash to shareholders — that is money not needed for investment or for regulatory reasons — by means of a regular special dividend payment.

Pleasingly for investors, Admiral’s ultra-defensive operations has given it the means to keep hiking dividends even during the height of the pandemic.

Spending on general insurance, and especially on motor insurance, which is a legal requirement, remains broadly stable during all points of the economic cycle. This explains why Admiral has continued to grow annual earnings in recent years.

In addition, a strong balance sheet has also allowed Admiral to keep growing the annual dividend recently. The business has remained financially robust too and its solvency ratio improved to 195% as of December 2021.

Mixed dividend forecasts

Its strong financial footing means City analysts believe Admiral will continue to raise the yearly dividend, to 165.8p per share. That’s even though earnings are expected to fall 28% year on year in 2022.

However, things begin to look a little less rosy for 2023. A full-year dividend cut to 130.9p per share is forecast. Yearly profits are tipped to slip 4% from this year, too.

Admiral’s dividend yield therefore slips to 7.1% for 2023.

The verdict

On balance then, should I buy Admiral shares for the dividend? Its defensive operations and cash-rich balance sheet makes it attractive. But the impact of soaring claims inflation is a worry to me.

It’s a problem that caused industry rival Direct Line to slash its profits forecasts last week. Then the business warned that “higher used car prices… higher third party claims costs, longer repair times and inflation in the cost of car parts” meant cost inflation was outpacing the rate at which premiums were rising.

This is worrying for Admiral’s dividend forecast. This year’s 165.8p estimated dividend is already higher than predicted earnings of 141.3p.

That being said, I’m still tempted to buy Admiral shares today. Even if 2022’s dividend fails to live up to that 9%-plus yield, there’s still a good chance the insurer will beat the broader FTSE 100 forward average of 3.8% by a mile. The same goes for next year, too.

Furthermore, as a long-term investor I view Admiral’s share price slump as a dip buying opportunity. Soaring inflation is a problem today. But in my opinion Admiral’s broad product offering, its excellent brand strength and global footprint should deliver solid profits growth in the years ahead. And this should result in many more lucrative dividends.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »